Wednesday, March 23, 2011

Gold Closes With Decent Gain On UK Inflation, US Real Estate Trouble

Elizabeth Taylor passing away today didn't affect the gold market, but the seeming near-death of the U.S. housing market did. After getting a boost in London trading due to U.K. inflation hitting 4.4% despite the prospect of a Bank of England rate hike, and with the BoE minutes reflecting worry about inflation temporarily going to 5%, gold got up to $1,433 shortly before regular trading started. Pulling back once the pit session started, a slide that was engendered by a rally in the greenback, it failed to fall below $1,430. It marked time around $1,432.

Then, the housing news hit. February new home sales plunged by 16.9% to a record low of a 250,000 annual rate seasonally adjusted. The median price for a new home caved in by 13.9% to $202,100. Since the exploded housing bubble was the cause of the '08 crisis, and housing is the main reason why the Fed has kept rates so low and policy so accomodative, this result suggests strongly that the Fed is going to be sticking with its near-zero interest rate policy. Its collapse, plus the current malise of the U.S. economy as a whole, may prompt the Fed to unveil QE3. A rise in WTI oil to above $105 also helped the metal, somewhat, and does tie in to stagflation worry.

Although gold skidded when the news was first released, it quickly regained its footing and marched up to a day's high of $1,442.30. That's less than four dollars away from its record high. Topping at 10:35, the metal then lost further interest and spent the next four hours slowly slipping down to $1,438. Then it stepped up to $1,440, but it couldn't hold that ground and revisited $1,438 again. Although there was a slight step-up in the last minutes, the metal didn't have enough spring in its step to close with a double-digit gain. Instead, the spot price closed at $1,438.60 for a gain of $9.80 on the day. The KitcoGold Index attributed +$18.80 to predominant buying and -$9.00 to a strengthening greenback. The U.S. Dollar Index's own rise didn't deter the metal.

Gold's six-month chart, from Stockcharts.com, shows today's advance as the sixth gain day in a row:

Not only has its earlier plummet been reversed, but also it's above where it was before March 15th's wipeout. Six gain days in a row is an unusual event, often occurring when gold's recovering in a consolidation stage. There are stretches like that in a bull run, but not as many as assumed: there's enough downward volatility amongst the upward volatility to keep such streaks scarce. In retrospect, the March 15th plummet was another fall out of bed rather than a trigger of an extended short-term decline. Gold is very close to making another record high, but there's the risk of profit-taking making an appearance. The metal going up from here depends upon the recent economic trouble developing into a new stagflation theme.

As noted above, the U.S. Dollar Index also rose today but that rise was not due to any significant safe-haven demand from the bad economic news; the timing didn't gibe. Instead, the Index was recovering from its recent fifteen-month low. Moving upwards before regular trading started, it rallied to touch 75.855 by 9:55 but dropped off shortly before gold took off. Recovering, it then fluctuated around 75.8 in early and mid-afternoon. A later-afternoon rally managed to reverse gold's own mid-afternoon walk-up. As of 5:30, the Index's rally was climaxing at 75.955.

Its own six-month chart, also from Stockcharts.com, makes today's uptracking look almost overdue:

The Index's Relative Strength Index, found at the top of its chart, sunk almost as low as thr 30 oversold level before its rebound kicked in. So, it was due for a bounce anyway. The trend is still downward, no matter how far the respite goes.

Gold's recovery will end up making people wonder why it plummeted in the first place, given that it did so on a disaster. In retrospect, it was prompted by emergency sales that threw the market out of whack. As the metal has returned to sunnier times, a new record beckons. It may make one in the overnight session, particularly if the Libyan warlet runs into unexpected diffculties...and if profit-taking doesn't erode today's gains.

Originally, The Gold Bubble was a perch for me to watch what I pegged as a nascent gold bubble - or, to be less controversial, the third stage of a long-term gold bull market.

As time went on, I drifted towards commentary on gold and the greenback, plus the interrelation between the two. The rest of the posts featured items about gold that I thought were interesting. I ended up diverging from the theme that the title promised.

So, I've reactivated the old blog under a different name. "The Gold Watcher" is a more accurate title for the blog that The Gold Bubble became.

The Enter Stage Right article that kicked off the predecessor blog contains a fuller explanation of my reasoning about a gold bubble: it's here. A sequel is here.

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Disclaimer

Although I try to compensate, I do have opinions that are almost certainly influenced by what I've done with my own money. For the record, I am long gold-exploration stocks. On the odd chance I mention one that I own, I'll disclose it fully. I don't own any physical gold, nor do I own any producers or any well-known explorers.

Also, I must emphasize that I am not a registered investment advisor, and that I am not licensed to dispense investment advice in my jurisdiction of residence (Ontario, Canada). Consequently, this is not an investment-advice blog. It shouldn't be taken as such. I cannot provide any actionable material in the standard sense of the term; if you're intrigued by anything here, you'll have to see to your own trigger.

In addition to the standard boilerplate caution for you to do your own due diligence should you invest or speculate, I'd like to add a special caution: gold, by far, is the asset class that elicits the most emotions. A solid consensus of experieced investment professionals considers emotionality to be a performance-hobbler. In addition to doing your own research, and/or using a licensed professional to do so, I suggest that you watch yourself.